February by the Charts: Hello $1-Trillion Club!

Never a boring day in crypto — February 2021’s price action certainly lives up to that. From laser eyes to concerted regulatory commentaries, the congregation of attention on the crypto space is only growing by the day.

1. BTC is now a bona fide macro asset

Feb. 19, 2021 will go down in history as the day crypto proponents collectively sent the world an “I told you so” with their laser eyes heralding Bitcoin’s arrival in the $1 trillion market cap club. Market capitalization is by far the most important yardstick in measuring the viability of an asset class, so ironically the higher this number goes, the more attractive it looks for institutional participation. The flip side of this, of course, is that macro assets don’t trade in a vacuum, but as correlated vehicles. This probably means that going forward, crypto is going to be less immune to TradFi moves like the recent spike in Treasury yields.

2. DeFi Wars: ETH losing its luster?

ETH’s skyrocketing gas fees have led to the inevitable discussion of whether its viability as the market-leading smart contract chain is in jeopardy. With no short-term solutions in sight, crypto markets have been quick to price in alternatives. The likes of Binance Smart Chain (BSC) and the price pump in layer 1 alternatives have seen a stellar month price performance-wise. Nonetheless, ETH has had a multi-year headstart in terms of developers/protocols and still commands a sizeable TVL margin over all competitors. The community is also adapting in the short term, with Vitalik Buterin’s proposal to remove gas refunds temporarily reducing bloated gas fees. With EIP-1559 and layer 2 solutions being sped up in the face of competition, whether competition will continue grabbing market share is still up for discussion. Let’s not forget that protocols are also adapting, with the likes of Sushiswap now operating cross-chain, eliminating the need for chain exclusivity in the long run.

3. Back to the futures

A notable divergence between futures basis and swap funding turned up toward the end of February, where funding reverted to normal levels and basis still maintained at decently high levels. This relative reduction in short-term leverage highlights the natural calming of euphoria seen since the start of 2021, as opposed to longer-term structural bullishness seen in futures basis levels. While this isn’t outright bullish or bearish, the market is still incentivizing cash and carry positions — which naturally reduces spot selling pressure in the short run.

4. Is Grayscale crypto’s Icarus?

Greek legend tells of Icarus, who flew too close to the sun. Not many could have predicted Grayscale’s premium to go negative just 6 months ago — but here we are. Its flagship GBTC product hit below -10% to NAV, a byproduct of retail exits from the product and the onslaught of new exchange-traded products coming online globally. With many market participants using GBTC as the spot leg of their cash and carry strategy, a persistent GBTC discount could have repercussions down the curve, widening basis out further while taking overall futures OI down — possibly pressuring spot. Despite the above, overall fund inflow data for February still held steady, with $2 billion new inflows, limiting the downside for spot.

5. The impact of options

Options’ traded volume has been rising steadily, ranging from 25%-30% of total spot volume in February. The incentives for options market participants are playing out to a larger degree on spot price, with both January and February’s max pain levels seemingly suppressing the latter. Could this be harkening to the eventual dominance of options over futures within the derivatives sphere? Watch this space.

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